Objective of the Firm
In economic analysis it is usual to take profit maximization as the only objective of the firm. Taking such a generalized objective becomes convenient in analyzing market structures, interaction and comparison between firms. But if we step beyond the standard text book literature we will find a number of analyses on theory of the firm that deal with objectives other than profit maximization or even with a number of firms with varying objectives. It becomes clear that the objective of the firm varies with a number of factors. These factors include the ownership structure of the firm, the organizational pattern of the firm, the market structure, the degree or threat of competition, the nature of the good being produced, and such others. In our discussion we are going to discuss two of the factors, ownership structure and the organizational pattern of the firm.
How Ownership Structure and Organizational Pattern Affects the Objective
In case of a private firm, the objective depends upon the organizational pattern. If the firm is owned and managed by the same person or group of persons, the objective is profit maximization. If the firm is organized as a joint stock company where the board of directors appoints a managerial team to run the organization, the objective of the managers is to maximize sales. Sales maximisation refers to the maximization of revenue. The output is produced till the marginal revenue reaches zero. That is the point where total revenue is maximized. (De Donder and Roemer, 2006).The objective of the stockholders remains profit maximization. This often gives rise to a conflict between the managers and the entrepreneurs. This conflict is also an interesting area of study in economics.
De Donder, P. and Roemer, J.E.(2006) Mixed Oligopoly Equilibria when Firms’ Objectives are Endogenous.Presented at the ESF exploratory workshop on “Designing Partnership between Government and the Private Sector: Cross-Disciplinary Perspectives”, Bristol, 2006.
Matsumura, T(1998) Partial Privatization in Mixed Duopoly. Journal of Public Economics, 70(1998) pp. 473-483.
Pindyck, R. and Rubinfield, D. (2008). Microeconomics. 7th edition. New Jersey:Pearson Prentice Hall.